Jens Nærvig Pedersen
Danske Bank A/S
We expect the current slide in oil prices to continue until we see producers starting to adjust to the lower prices by lowering output around mid next year.
Based on the difference in crude oil prices and production costs, producers of unconventional oil in, for example, the US, Canada and Brazil look more vulnerable.
We see some probability of a cut in OPEC’s output target in June.
Pricing in the forward market and the experience of the 1986 oil glut indicates that the price of Brent crude oil will recover to USD85/bl in the medium term.
We have revised down our oil-price forecasts. We now expect the price of Brent crude oil to bottom in Q1 next year at around USD58/bl (revised down from USD87/bl) and average USD67/bl in 2015 and USD85/bl in 2016 respectively (revised down from USD93/bl and USD99/bl).
The lesson from the 1986 oil glut
As we wrote in Research Commodities: The oil price plunge in perspective – déjà vu #1, 12 December 2014, the current plunge in oil prices is reminiscent of the collapse in oil prices in 1985 and 1986. In November 1985, oil prices started a sharp downturn, when OPEC, led by Saudi Arabia, initiated a price war to regain a larger share of the global oil market by flooding the market.
The OPEC-led price war came to a halt three to four months later when the oil price had reached a level that led to the beginning of a decline in OECD oil production, most notably in the US. It marked the peak in OECD oil production and further started a gradual recovery in oil prices.
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